Essential Factors In Valuation Of Oil Properties

THE most important factors that should be given consideration in valuation of oil land are: (1) the amount of oil the property will produce; (2) the amount of money this oil will bring (based upon the future prices of oil) ; (3) development and production costs; (4) the rate of interest on the investment; (5) the retirement or amortization of invested capital; and (6) the salvage or "scrap" value of the equipment when the property is exhausted. These factors are of varying importance, and some of them may not enter all valuation problems, but most of them should be given consideration in any valuation even though only a rough estimate of the value of the property is desired. The value of a property may be changed over-night by the completion of important test wells, by the sudden water flooding, or by a change in the price of oil. The best a petroleum engineer can give is the value of the property under the conditions existing at the time the appraisal is made with a fair forecast of future action of the wells and of the price of oil. Our experience in the scientific valuation of oil lands is not broad and there is very little published information on the subject; it, therefore, becomes necessary in studying such problems to form comparisons with the factors involved in the valuation of mines-the closest parallel. One of the reasons for the lack of substantial progress in oil-land valuation methods has been the necessity of making an estimate of the future production of the oil property to be valued. Oil men and accountants have not generally conceded that such estimates could be made with any degree of accuracy. It has been shown, however, in several recent publications that with certain data available reasonably close estimates can be made. The accuracy of an appraisal depends chiefly on the accuracy of the estimates of future production and of the future price of oil. The accuracy of the former is sometimes necessarily based on geological inferences. Geology is not an exact science and geological data in connection with oil production cannot always be mathematically evaluated.